Should investors dump techs after Warren calls for them to be broken up?

As the possible next US President says that she wants to break-up the techs, should investor’s sell out?

Article updated: 13 March 2019 11:00am Author: Michael Baxter

Nick Clegg must have been spitting feathers, or maybe, as it was Clegg, merely looking for a compromise. Facebook probably did the worst thing that they could do. They only went along and banned ads from Elizabeth Warren, one of the front runners in the race to be the Democrat candidate in the next US Presidential election. Why did they do that? Well, the ads called for the breakup of Facebook, along with Amazon and Alphabet/Google.

You can imagine the angst. If you contacted your local newspaper and said you wanted to run an advertising campaign in the paper calling for it to be broken up, you would probably get short shrift.

But Facebook isn’t a newspaper, it has long argued that it isn’t a publication, rather it’s a platform. It is a channel for users to communicate with each other and publish their own content.

It is just that Facebook makes most of its money from advertising. As media analyst William Shakespeare said: “That which we call a media company, by any other name smells so...” Not sure what to put as the next word: ‘sweet’, ‘of fake news’ ‘of the gutter’. It depends on the media company.

Ms Warren ran a series of ads stating that: “Three companies have vast power over our economy and our democracy. Facebook, Amazon, and Google. We all use them. But in their rise to power, they’ve bulldozed competition, used our private information for profit, and tilted the playing field in their favour.”

Facebook says that the ads were taken down because they violated its policy regarding use of its corporate logo.

Then it changed its mind. Maybe the company’s PR man, a chap called Nick Clegg, rang up his boss and said: “Look here Zuck, we can’t do this.”

But what Facebook actually said was: "In the interest of allowing robust debate, we are restoring the ads.”

By then it was too late, Elizabeth Warren said her point had been proven, you can see the argument.

The plan

In a post on Medium, the potential next US President said: “Today’s big tech companies have too much power — too much power over our economy, our society, and our democracy. They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation.”

She wants to separate any company with a turnover in excess of $25 billion that provides a platform but is also a participant on that platform.

Monopoly

She is not necessarily wrong — but the detail reveals issues.

Facebook is a natural monopoly — it benefits from what is known as a network effect. The more people use it, the more valuable per user it becomes.

But it faces a challenge. Normally, trends in this market place are set by kids, or students. And among these people, Facebook is no longer cool. What teenager wants to reveal details of their personal life on a platform which their granny reads? In addition to that, many others are boycotting Facebook over privacy fears, compounded by the Cambridge Analytica saga.

Okay, Instagram and WhatsApp, both owned by Facebook, are performing better with the younger demographic, but Ms Warren wants to separate Facebook from these subsidiaries. If she gets her way, this would have a devastating impact upon the company — but frankly, I think Facebook has problems anyway.

Amazon

I think the case for breaking up Amazon is stronger. This company is disrupting the retail business worldwide, without necessarily having to make the ratio of profits to revenues that shareholders demand from the likes of Tesco.

Until recently, it wasn’t even making a profit. And yet it has had a devastating impact on high streets across the world. Now its cloud services division, AWS is generating substantial profits and is growing fast. But if Amazon were to use these profits to fund its grab for market share in retail, would that be fair?

I can also say, that as someone who had sold his own books on Amazon, I think the company has way too much power over suppliers.

Five years or so ago, I waxed lyrical about Amazon as an investment opportunity here, but I am no longer so sure.

Whether it falls under a Warren axe, or falls foul of regulators in another way, I think Amazon has anti trust related challenges ahead of it.

Alphabet/Google

What I like about Alphabet is its diversification. Its subsidiary DeepMind leads the world in AI, but other divisions within the company are at the cutting edge of AI too. Its venture capital arm has made some interesting investments, including into RPA company UiPath. Then there are its investment into healthtech and autonomous cars.

Amazon is disrupting an industry which employs millions of people and supports our way of life, Google is creating new industries.

Don’t get me wrong. There is something terrifying about how its search engine advances. One day Google hopes to know what we want before we do, I feel uneasy about that.

And clearly, the Google adverting model has had a devastating impact on the publishing industry — not a good thing.

The lesson of history

It has happened before, Standard Oil and AT&T were broken up and the result was more competition.

According to Warren, anti trust cases against Microsoft not only supported competition but actually created a window which enabled Google’s success.

Investors

I am not at all surprised to hear about Elizabeth Warren’s plans. And I would indeed say that they pose threats to the trio of techs she focused on.

Note: she made no mention of Apple and Microsoft. Personally, I think Alphabet’s diversification, building upon its AI expertise would still make it enormously valuable, with great growth potential, even after breakup. I think that AWS has lots more scope for growth.

I see an opportunity ahead, as fears over a possible breakup grows, markets will underestimate the potential upside.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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